Advisers who remember the launch of Money Marketing20 years ago have seen their business world changed beyond recognition. They will have seen polarisation and depolarisation, suffered through the pension review and endowment review and are now grappling with the payment menu system, not to mention a massive escalation in professional indemnity insurance costs. They also face paying more and more for the Financial Services Compensation Scheme as more firms have fallen by the wayside, with their liabilities falling on their peers.
Has regulation really changed things for the better? Former Aifa director general Paul Smee says: “Regulation is born in a crisis and is consequently an over-reaction. Subsequently, the ratchet may be relaxed but never enough before the next crisis leads to the next over-reaction.“
Twenty years ago, a consumer unhappy with the advice he or she received would have had little recourse. With no proper complaints scheme, they would have been forced to complain to the adviser and if this proved ineffectual, there was the possibility of suing through the civil courts.
There was very little in the way of regulation for advisers. Personal Finance Society head of public affairs John Ellis says: “Basically, there were no rules. There were a few worthy codes of practice, but nobody paid much attention to them. Rules only came into effect in April 1988.“
Ellis was part of the team who drafted a financial services White Paper in 1985 which led to the Financial Services Act 1986 which came into force in 1988, bringing polarisation with it. “Then a lot started to change, “ says Ellis. “Companies started to get compliant before the act came into play to be ready for theoff, in April 1988 when it was all enforced.“
In 1988, the financial services arena was often compared with the Wild West. By 1998, for the first time, advisers were held accountable for their actions although in the early years it was thought that the winners from the new system would be the tied salesforces which insurers began to set up with gusto. Scandals continued to break – the biggest to hit intermediaries being Barlow Clowes and the collapse of the Levitt Group but there were others.
The Securities and Investments Board was set up to oversee the industry via a number of self-regulating organisations, with most IFAs under Fimbra, an organisation that was popular, by comparison with its successors, with the advisers it regulated. Lautro regulated the life offices and fund management firms although Imro also catered for the latter. By 1992, a head of steam built up for all product providers and IFAs to be brought under one organisation and the Personal Investment Authority was set up despite resistance from adviser trade bodies, bringing members of Fimbra, Lautro and Imro brokers under one umbrella. Relations between IFAs and the PIA were never very happy, with decisions often challenged, particularly on the conduct of the pension review as concerns grew over transfers and opt-outs from company pension schemes to personal pensions.
Chairman of consultancy Special Risks Bureau and former head of the National Federation of IFAs and the IFA Association, Garry Heath, emerged as one the most popular, if controversial, spokesmen for IFAs in the 1990s. He says: “If you have a regulatory body, it completely writes off the whole concept of commercialism. All the norms of being a professional are taken out of the system and it is a completely different thing.“
But Ellis believes regulation was necessary. He says “all sorts of strange things were going on “ and points out there was nowhere for people to take their complaints. The Financial Services Act 1986 imposed some order on an industry but the selfregulatory bodies meant confusion for companies and consumers and it was clear that further changes had to be made.
Ellis says: “The Department of Trade and Industry made a big mistake in allowing self-regulating organisations to be created. There were up to 12 of these and it was terribly muddled.“
When Labour came to power in 1997, Chancellor Gordon Brown gave the Bank of England independence and announcedhis intention to reform financial services regulation in the UK and create a single statutory regulator for the insurance, banking and investment industries – the Financial Services Authority. Many felt that the Bank of England men would take over and some believe they have.
The mega piece of legislation, the Financial Services and Markets Act 2000, came into force on November 30, 2001 and gave the FSA the power to regulate IFAs, insurers, banks, investment firms, building societies, friendly societies, taking over the powers of the self-regulatory bodies and much more.
The act also created a Financial Ombudsman Service and a Financial Compensation Scheme from the old Investors’ Compensation Scheme. The move to bring together all the ombudsmen was viewed as a big step forward by consumer groups but Heath says: “With the Financial Ombudsman Service, consumers are encouraged to complain by the regulator or by a consumer group as a matter of course.“
The FSA, headed at first by Sir Howard Davies, has taken enforcement actions with rigour, fining life offices, fund firms, IFAs and networks for misselling. It has negotiated hard for split-cap compensation and effectively closed down firms over precipice bonds.
The FOS annoys advisers because it makes them pay up even when they win cases. The pension review, an endowment review and other actions took the steam out of many IFA businesses while professional indemnity costs went through the roof.
IFA representation changed with the new regulator as some felt that the IFA Association was holed beneath the water for trying to argue that the terms of the pension review were unfair after a vitriolic speech by Trade and Industry Secretary Patricia Hewitt in the House of Commons in 1999.
It was replaced by the Association of IFAs, which brought together all the IFA organisations, initially headed by former ABI man Paul Smee who steered it in a more conciliatory direction.
The Government introduced stakeholder pensions in a failed bid to end misselling and then used the Office of Fair Trading to finish off polarisation. The new system sees IFAs now grappling with the menu of charges and the advent of multi-ties. It brought a dash for distribution with product providers buying stakes in IFAs or taking them over outright.
Smee was the architect of the menu and believes his system has been over-complicated because “regulators are never totally focused on a single objective so they over-complicate by trying to use one mechanism to hit several targets. That is why the menu got so complex. The main source of regulation has been the commission system. The recipients of advice do not pay for it but one cannot expect the regulatory burden to diminish.“
The Government moved to regulate mortgages with cumbersome documentation. Mortgage brokers are still grappling withthe costs of regulation and general insurance has also been brought under regulation.
Garry Heath – Chairman, Special Risks Bureau
It all started with such modest ambitions. A perceived need for some protection after a couple of advisers had defrauded their clients. Disquiet over they way some direct salesforces were behaving and a failure by the industry to volunteer to put measures in place gave the industry the Financial Services Act.
The initial concern for Fimbra was fraud and here we started to see the power of the press. The number of frauds was tiny and amounts were minuscule, particularly in comparison with solicitors’ fraud claims. But the media were only too keen to portray the greedy and the stupid as victims of an industry sponsored holocaust.
Regulation was based on the concept of self-regulation and the costs involved were notionally controlled by representatives of the regulated. At least there were a number of years where advisers assisted Fimbra’s staff in making massive improvements in standards but the activities of the PIA forced the creation of statutory regulation but with a twist.
We now have taxation without representation. The statutory regime allows an uneasy cabal of politicians, Treasury officials and regulators to cook up the next problem in full knowledge that the industry will pay for it and that they can launder any future blame for their activities. It is not in their vested interests for the industry ever to be seen as a safe environment for the public to invest. The inclusion of self-appointed consumerists in the process has singly failed to represent the real group who need protection, the shareholders and policyholders.
Let us just park the current cost of FSA at £266m a year as an investor’s Danegeld. Let us look at the £20bn plus that was expended during the pension review or the hundreds of millions of pounds that the endowment review will cost. These costs have been paid for by shareholders and policyholders in an enormous redistribution of wealth based on whether you had a lucky ticket in the review lottery.
The reviews also destroyed the industry’s foundations which are rooted in commercial law. IFAs may soberly look at the financial strength of providers and regulators insist on capital adequacy for advisers but the way that the ombudsman system can be used to circumvent concepts of limitation, evidence and proof makes any balance sheet a complete work of fiction.
The way forward? I would suggest that we return to basics. Let us treat clients as adults and restore caveat emptor. Judge advice at the time it was given with the evidence available. Compensation should be based on commercial law with a downside however minor for an unsuccessful complainant. Regulators should do a few things well and avoid attempting to manage those they regulate. Finally, we all need to remember we only exist to improve the lot of shareholders and policyholders.
Anything else is just parasitic.
Paul Smee – First director general, Aifa
If I may mix Jane Austen with the Bible, it is a truth universally acknowledged that where two or three IFAs are gathered together, then they shall moan about regulation.
And one can see why. Smee’s First Law of Regulation states that regulation is born in a crisis, that its initial imposition is invariably an over-reaction and that, whatever moves are made in mitigation, these are never sufficient to temper its effects before the next crisis leads to the next tightening of the screw.
Add to this an institutional scene where regulatory bodies shifted rapidly between acronyms and an equity market which touched the heights before sinking to the depths and one can see why regulation has been a staple topic of conversation.
Regulators also have caught the besetting industry curse of over-complexity. Some product providers love to add bells and whistles to products until their original and important purpose lies buried beneath the frills. Some regulators lose sight of a clear objective beneath a torrent of rules and guidance and more rules.
Take the simple principle of the payment menu (and I may have gone but I still remember the menu). Compare that simple principle, all about demonstrating the value of advice, with the document as it now stands. The same piece of paper was to be used for comparators and as a device for shopping around, as much as a means for assessing value. No wonder that it looks and feels complex. Regulators need a few targets and they need to hit them precisely, not with a scattergun. One objective per initiative should be the rule.
Is regulatory attention inevitable? I can see no quick exit route, especially while the givers of advice are primarily remunerated by providers via a commission system of staggering complexity, beyond the whit of normal humans to comprehend. Commission looks like it needs regulating and, boy, haven’t the regulators risen to the challenge? Commission should be seen as a convenient means of remunerating advisers, not an end in itself. More work is needed in proving this.
We should also remember that regulators gave the world polarisation, a means by which the concept of independent advice could take a name and become a brand. At the heart of successful IFAs lie not regulatory obligations but a focus on the client. Independent advice should be a badge worn with pride as a statement of value, recognised and appreciated by the discerning client. I hope that, even in a depolarised world, the pride remains